Basis of presentation and accounting...

Basis of presentation and accounting principles

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Generali Group - Annual Integrated Report and Consolidated Financial Statements 2015

Basis of presentation

The Generali Group’s consolidated financial statements at 31 December 2015 were drawn up in accordance with the IAS/IFRS issued by the IASB and endorsed by the European Union, in accordance with the Regulation (EC) No. 1606 of 19 July 2002 and the Legislative Decree No. 58/1998, as subsequently amended.

The Legislative Decree No. 209/2005 empowered ISVAP to give further instructions for financial statements in compliance with the international accounting standards.

In this yearly report the Generali Group prepared its con-solidated financial statements and Notes in conformity with the ISVAP (now IVASS) Regulation No. 7 of 13 July

2007, as subsequently amended, and information of the Consob Communication No. 6064293 of 28 July 2006.

As allowed by the aforementioned Regulation, the Gen-erali Group believed it appropriate to supplement its consolidated financial statements with detailed items and to provide further details in the Notes in order to also meet the IAS/IFRS requirements.

The consolidated financial statements at 31 December 2015 were approved by the Board of Directors on 17 March 2016.

The consolidated financial statements at 31 December 2015 were audited by Reconta Ernst&Young S.p.A., the appointed audit firm from 2012 to 2020.

Consolidated financial statements

The set of the consolidated financial statements is made up of the balance sheet, the income statement, the statement of comprehensive income, the statement of changes in equity and the statement of cash flow, as re-quired by the ISVAP Regulation No. 7 of 13 July 2007, as subsequently amended. The financial statements also include special items that are considered significant for the Group.

The Notes, which are mandatory as minimum content established by ISVAP (now IVASS), are presented in the appendices to the notes to this report.

This yearly report is drawn up in Euro (the functional currency used by the entity that prepared the financial statements) and the amounts are shown in millions, un-less otherwise stated, the rounded amounts may not add to the rounded total in all cases.

Consolidation methods

Investments in subsidiaries are consolidated line by line, whereas investments in associated companies and in-terests in joint ventures are accounted for using the eq-uity method.

The balance sheet items of the financial statements de-nominated in foreign currencies are translated into Euro based on the exchange rates at the end of the year.

The profit and loss account items are translated based on the average exchange rates of the year. They reason-ably approximate the exchange rates at the dates of the transactions.

The exchange rate differences arising from the transla-tion of the statements expressed in foreign currencies are accounted for in equity in an appropriate reserve and recognized in the profit and loss account only at the time of the disposal of the investments.

Basis of consolidation

The consolidated financial statements of the Group in-clude the financial statements of Assicurazioni Generali SpA and its subsidiaries.

Subsidiaries are all entities (including structured entities) over which the Group has control. Control is achieved when the Group is exposed, or has rights to variable re-turns from its involvement with the investee and has the ability to affect those returns through its power over the investee.

Specifically, the Group controls an investee if, and only if, the Group has:❚ power over the investee (i.e., existing rights that give it

the current ability to direct the relevant activities of the investee);

❚ exposure, or rights, to variable returns from its involve-ment with the investee;

❚ the ability to use its power over the investee to affect its returns.

Generally, there is a presumption that a majority of vot-ing rights result in control. To support this presumption and when the Group has less than a majority of the vot-ing or similar rights of an investee, the Group considers

all relevant facts and circumstances in assessing wheth-er it has power over an investee, including:❚ The contractual arrangement with the other vote hold-

ers of the investee;❚ Rights arising from other contractual arrangements;❚ The Group’s voting rights and potential voting rights.

The Group reviews periodically and systematically if there was a variation of one or more elements of con-trol, based on the analysis of the facts and the essential circumstances.

Assets, liabilities, income and expenses of a subsidiary acquired or disposed of during the year are included in the consolidated financial statements from the date the Group gains control until the date the Group ceases to control the subsidiary.

In preparing the consolidated financial statements:❚ the financial statements of the Parent Company and

its subsidiaries are consolidated line by line through specific “reporting package”, which contribute to the consistent application of the Group’s accounting poli-cies. For consolidation purposes, if the financial year-end date of a company differs from that of the Parent Company, the former prepares interim financial state-ments at December 31st of each financial year;

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Generali Group - Consolidated Financial Statements

Exchange rates of the balance sheet

Currency Exchange rate at the end of the period (€)

31/12/2015 31/12/2014

US dollar 1.086 1.210

Swiss franc 1.087 1.202

British pound 0.738 0.776

Argentine peso 14.062 10.242

Czech Koruna 27.022 27.715

Exchange rates of the income statement

Currency Average exchange rate (€)

31/12/2015 31/12/2014

US dollar 1.111 1.329

Swiss franc 1.068 1.215

British pound 0.726 0.806

Argentine peso 10.267 10.773

Czech Koruna 27.287 27.537

❚ All intra-group assets and liabilities, equity, income, expenses and cash flows relating to transactions be-tween members of the Group are eliminated in full on consolidation (intra-group losses are eliminated, except to the extent that the underlying asset is im-paired);

❚ the carrying amount of the Parent Company’s invest-ment in each subsidiary and the Parent Company’s portion of equity of each subsidiary are eliminated at the date of acquisition;

❚ Profit or loss and each component of other com-prehensive income (OCI) are attributed to the eq-uity holders of the Parent of the Group and to the non-controlling interests, even if this results in the non-controlling interests having a deficit balance. The non-controlling interests, together with their share of profit are shown as separate items.

A change in the ownership interest of a subsidiary, with-out a change of control, is accounted for as an equi-ty transaction. Consequently, no additional goodwill or badwill is recognized.

If the Group loses control over a subsidiary, it derecog-nizes the related assets (including goodwill), liabilities, non-controlling interest and other components of equi-ty while any resultant gain or loss is recognized in profit or loss. Any investment retained is recognized at fair value.

Investment funds managed by the Group in which the Group holds an interest and that are not managed in the primary interest of the policyholders are consolidated based on the substance of the economic relationship and if whether the conditions of control stated by IFRS 10 are satisfied. On consolidation of an investment fund, a liability is recognized to the extent that the Group is legally obliged to buy back participations held by third parties. Where this is not the case, other participations held by third parties are presented as non-controlling interests in equity.

Business combination and goodwill

Business combinations are acquisitions of assets and liabilities that constitutes a business and are account-ed for applying t he so- called acquisition method The acquisition cost is measured as the sum of the consid-eration transferred measured at its acquisition date fair value, including contingent consideration, liabilities as-sumed towards the previous owners, and the amount of any non- controlling interests. For each business

combination, the Group elects whether to measure the non-controlling interests in the acquiree at fair value or at the proportionate share of the acquiree’s identifiable net assets. Acquisition-related costs are expensed as incurred and included in administrative expenses.

If in a business combination achieved in stages, the ac-quirer’s previously held equity interests in the acquire is re-measured at its acquisition date fair value and any resulting gain or loss recognized in profit or loss.

Any contingent consideration to be transferred or re-ceived by the acquirer will be recognised at fair value at the acquisition date. Contingent consideration classified as an asset or liability that is a financial instrument and within the scope of IAS 39 Financial Instruments: Recog-nition and Measurement, is measured at fair value with changes in fair value recognised either in either profit or loss or as a change to other comprehensive income. If the contingent consideration is not within the scope of IAS 39, it is measured in accordance with the appropri-ate IFRS. Contingent consideration that is classified as equity is not re-measured and subsequent settlement is accounted for within equity.

The assets acquired and liabilities assumed in a busi-ness combination are initially recognized at fair value at the acquisition date. Goodwill is initially measured at cost being the excess of the aggregate acquisition cost over the net value of the identifiable assets acquired and liabilities assumed is accounted for as goodwill. In the case of the acquisition cost is less than the fair value of the assets acquired and liabilities assumed, the differ-ence is recognised in the profit and loss account.

Investments in associates and joint ventures

The investments in associates and joint ventures are consolidated trough the equity method.

An associate is an entity over which the investor has significant influence. Significant influence is the power to participate in the financial and operating policy de-cisions of the investee but is not control or joint control over those policies. If an investor holds, directly or indi-rectly through subsidiaries, 20% or more of the voting power of the investee, it is presumed that the investor has significant influence.

In general, joint arrangements are contractual agree-ments whereby the Group undertakes with other parties

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an economic activity that is subject to joint control. In-vestments in joint arrangements are classified as either joint operations or joint ventures depending on the con-tractual rights and obligations each investor has rath-er than the legal structure of the joint arrangement. A joint venture is a type of joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the joint venture. Joint control exists when it is contractually agreed to share control of an economic activity, which exists only when decisions about the relevant activities require the unanimous con-sent of the parties sharing control.

Generali Group has assessed the nature of its current joint arrangements and determined them to be joint ven-tures and none are joint operations.

The considerations made in determining significant in-fluence or joint control are similar to those necessary to determine control over subsidiaries. Investments in associates and joint ventures are accounted for using the equity method and they are initially recognized at cost, which includes goodwill arising on acquisition. Goodwill is not separately tested for impairment. Neg-ative goodwill is recognized in the income statement on the acquisition date. The carrying amount of the invest-ment is subsequently adjusted to recognize changes in the Group’s share of the net assets of the associate or joint venture since the acquisition date. The income statements reflects the Group’s share of the results of operations of the associate or joint venture. Any change in OCI of those investees is presented as part of the Group’s OCI. Dividends receivable from associates are recognized as a reduction in the carrying amount of the investment.

At each reporting date, after application of the equity method the Group determines whether there is objec-tive evidence that the investment in the associate or joint venture is impaired. If there is such evidence, the Group calculates the amount of impairment as the difference between the recoverable amount of the associate or joint venture and its carrying value, then recognizes the loss as ‘Share of losses of an associate’ in the income statement. Where the Group’s share of losses in an as-sociate equals or exceeds its interest in the associate, including any other unsecured long-term receivables, the group does not recognize further losses, unless it has incurred obligations or made payments on behalf of the associate or joint venture.

Upon loss of significant influence over the associate or joint control over the joint venture the Group measures

and recognizes and retained investment at its fair value. Any difference between the net proceeds and the fair value of the retained interest and the carrying amount is recognized in the income statement and gains and losses previously recorded directly through OCI are re-versed and recorded through the income statement.

Significant judgements in determining control, joint control and significant influence over an entity

Following the guidelines set out in the strategic plan, the Group has recently concluded some transactions that have led to fully control the most part of its subsidiaries. The control is normally ensured by the full ownership of the voting rights, having thus the ability to direct the rel-evant activities and consequently being exposed to the variability of results arising from those activities.

The Group controls all the companies for which holds more than half of the voting rights. The Group does not control any subsidiary having less than the majority of voting rights and does not control any entity even though it holds more than half of the voting rights, except in two cases in which the Group controls the company owning half of the voting rights, being exposed to the variability of returns that depend on the operating policies that the Group, in substance, has the power to direct .

To a minor extent, the Group holds interests in asso-ciates and joint ventures. The agreements under which the Group has joint control of a separate vehicle are qualified as joint ventures where they give rights to the net assets.

In one case, the Group has no significant influence on a subject for which it holds more than 20% of the vot-ing rights as the government structure is such that the Group, in substance, does not have the power to partic-ipate in financial and operating policies of the investee.

Regardless of the legal form of the investment, the eval-uation of the control is made considering the real power on the investee and the practical ability to influence rele-vant activities, regardless of the voting rights held by the parent company or its subsidiaries.

In the Annexes the complete list of subsidiaries, asso-ciates and joint ventures included in the consolidated financial statements at 31 December 2015 is presented . Unless otherwise stated, the annex shows the share capital of each consolidated entity and the proportion of

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ownership interest held by the Group equals the voting rights of the Group.

The qualitative and quantitative disclosures required by IFRS 12 are provided in the paragraph “Information on consolidation perimeter and Group companies” in the Notes.

Foreign currency transactions and balances

Transactions in foreign currencies are initially recorded by the Group’s entities at their respective functional cur-rency spot rates at the date the transaction first qualifies for recognition.

Monetary assets and liabilities denominated in foreign currencies are translated at the functional currency spot rates of exchange at the reporting date.

Differences arising on settlement or translation of mon-etary items are recognised in profit or loss with the ex-

ception of monetary items that are designated as part of the hedge of the Group’s net investment of a foreign op-eration. These are recognised in other comprehensive income until the net investment is disposed of, at which time, the cumulative amount is reclassified to profit or loss. Tax charges and credits attributable to exchange differences on those monetary items are also recorded in other comprehensive income.

Non-monetary items that are measured in terms of his-torical cost in a foreign currency are translated using the exchange rates at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value is determined. The gain or loss arising on translation of non-monetary items measured at fair value is treated in line with the recognition of gain or loss on change in fair value of the item (i.e., translation differences on items whose fair value gain or loss is rec-ognised in other comprehensive income or profit or loss are also recognised in other comprehensive income or profit or loss, respectively).

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Accounting principles

The accounting standards adopted in preparing the consolidated financial statements, and the contents of the items in the financial statements are presented in this section.

New accounting principles, changes in the accounting rules and in the financial statements

Following the endorsement of the European Union, as from the 1st January 2015 new principles and amend-ments shall be applied. The most relevant changes for the Group with respect to the consolidated financial statements at 31 December 2014 are described below. In addition, the main documents issued by the Interna-tional Accounting Standard Board, that could be rele-vant for the Group, but not yet effective, are described

New accounting principles, changes in the accounting rules that shall be applied from 1 January 2015

Following the endorsement in the European Union by Regulation (UE) 634/2014, for the annual period began at 1st January 2015 the interpretation IFRIC 21 has been applied. In particular, the interpretation clarify when an entity shall recognize a liability for a levy, that consists in a tax linked to a particular activity: for example, in some countries there is a tax for entities acting in a specific market or which belong to a particular industry. For ex-ample, the activity that originates the tax payment may be the generation of income in the current year and the calculation of this tax is based of income generated in the previous year; in this case the obligating event is the generation of income in the current year. The liability is accounted as follows:❚ recognized in balance sheet progressively if the obli-

gating event occurs over a period of time;❚ if the obligation to the tax payment is triggered when

a minimum threshold is reached (for example a mini-mum of revenues, or sales or expenses), the corre-sponding liability is recognised one-off when the min-imum threshold is reached.

This interpretation has not material impacts for Generali Group.

New accounting principles and amendments not applicable

IFRS 9 – Financial Instruments

IFRS 9 replaces IAS 39 “Financial Instruments: Clas-sification and Measurement” and includes a princi-ple-based model for the classification and measure-ment of financial instruments, an impairment model based on expected losses and an hedge accounting approach more in line with risk management strategies.

Classification and measurement

IFRS 9 introduces an approach to the classification of financial instruments that is based on contractual cash flows characteristics and models through which finan-cial instruments are managed (business model).

The standard provides for special treatment when it re-lates to debt instruments. In particular, the classifica-tion of financial instruments is driven by the business model through which the company manages its invest-ments and the contractual terms of their cash flows.

A financial asset is measured at amortized cost if both of the following conditions are met:

❚ the asset is held to collect cash flows(business model assessment)

❚ the contractual cash flows represent only payments of principal and interest (solely payments of principal and interest – SPPI)

Considering to the contractual characteristics, a finan-cial instrument is eligible for measurement at amortized cost if it consist in a basic lending agreement. The entity shall make its own assessment on the single financial in-strument to assess if the nature of the contractual cash flows characteristics exclusively consists in payments of principal and interest (SPPI,). If a modification of the time value of the interest results in cash flows that are signifi-cantly different than those of a basic lending agreement then the instrument must be classified and measured at fair value through profit or loss.

If the business model (assessed on portfolio basis) has the objective to collect the cash flows from the invest-

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ments and to sell financial assets and the contractual cash flows characteristics represent only payments of principal and interest, the financial instrument under as-sessment shall be measured at fair value through other comprehensive income with recycling to profit or loss when the instrument is realized.

As in the current IAS 39 Financial Instruments: classi-fication and measurement the entity has the ability at initial recognition, to designate a financial instrument at fair value through profit or loss if that would eliminate or significantly reduce the accounting mismatch in the measurement of assets or liabilities or recognition of gains and losses related to them.

The equity instruments shall be classified and measured at fair value through profit or loss. The entity has the ir-revocable option at initial recognition to present chang-es in the fair value of the equity instruments that are not held for the purpose of trading at fair value recorded in other comprehensive income, with no recycling in the income statement except dividends .

In other cases, the financial instruments are classified and measured at fair value through profit or loss, which is the residual model.

Impairment

IFRS 9 introduced a new impairment approach for debt instruments measured at amortized cost or fair value re-corded in other comprehensive income, which is based on expected losses. In particular, the new standard out-lines an approach for the impairment in three stages based on the assessment of credit quality from the date of initial recognition at each balance sheet date:❚ Stage 1 includes the financial instruments that have

not had a significant increase in credit risk since initial recognition or that have low credit risk at the report-ing date (investment grade). For these assets are rec-ognized for expected losses over the next 12 months (12-month expected credit losses - losses expected in view of the possible occurrence of events of default in the next 12 months) in a capital reserve (loss allow-ance), and in the profit or loss account. Interest is cal-culated on the carrying amount (ie without deduction of the loss allowance);

❚ Stage 2 includes financial instruments that have had a significant increase in credit risk since initial recog-

nition (unless they have low credit risk at the report-ing date) but that do not have objective evidence of impairment. For these assets, lifetime ECL are recog-nised in a capital reserve (loss allowance), and in the profit or loss account , but interest revenue is still cal-culated on the gross carrying amount of the asset. (ie without deduction of the loss allowance);

❚ Stage 3 includes financial assets that have objective evidence of impairment at the reporting date. For these assets, lifetime ECL are recognised in a capital reserve (loss allowance), and in the profit or loss ac-count. Interest revenue is calculated on the net carry-ing amount (that is, net of credit allowance)

The model also introduces a simplified approach to trade receivables and leases for which it is not neces-sary to calculate the 12- month expected credit losses but are always recognized the lifetime expected credit losses.

The Group is assessing the impact of the new impair-ment model introduced by the standard and expects significant operational impacts related to the implemen-tation of the calculation process of the abovementioned expected credit losses. In light of the high creditwor-thiness of the debt securities, the new model Expected Credit Losses should not result in significant impacts on the overall financial and economic situation of the Group.

Hedge accounting

IFRS 9 introduces a model substantially reformed for hedge accounting that allows better than in IAS 39 to reflect in financial statements the hedging activities un-dertaken by risk management.

In particular there is a significant simplification of the effectiveness test. There are no more predetermined thresholds of coverage to achieve effective hedge (ie 80-125% in the current IAS 39),but it is sufficient that:❚ there is an economic relationship between the hedg-

ing instrument and the hedged item; and❚ credit risk should not be the key component of the

hedged risk (ie the change in fair value of the hedging relationship must not be dominated by the component of credit risk).

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The standard will be effective, in the case of endorse-ment, from annual periods beginning on or after 1 Jan-uary 2018. A transitional provision allows to continue to apply IAS 39 for all hedging transactions until comple-tion of the macrohedging project. The principle has not been endorsed by the European Union.

During 2015, the Group has undertaken a preliminary as-sessment of the implementation impacts relating to the forthcoming application of IFRS 9. On the basis of these pre-assessment activities, the key areas for intervention have been identified and which will be addressed in the subsequent implementation phase for the purpose of ensuring the correct and homogeneous application of the new accounting standard. Following this assess-ment the Group expects impacts that could be material regarding classification and measurement of financial instruments and consists in a larger part of financial in-vestments measured at fair value through profit or loss. Concerning impairment the Group assessed that the new Expected Credit Losses model should lead to less significant impacts in the Group financial statements.

IFRS 4 – Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts (Exposure Draft)

On 15 December 2015 the IASB published the exposure draft “Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts. Both the standards, IFRS 9 (with effective date 1 January 2018) and the new IFRS 4 (with subsequent effective date) are relevant for insurance en-tities.

The E.D. aims to address the concerns of some inter-ested parties, in particular insurers, about the different effective dates of IFRS 9 Financial Instruments and the forthcoming new insurance contracts Standard.

The application of IFRS 9 beginning from 1 January 2018 would have the following critical issues:❚ additional volatility to profit or loss arising from the ap-

plication of SPPI test;❚ higher costs caused by a first implementation of IFRS

9 without appropriate international accounting stand-ard fort insurance liabilities and a following revision of the implementation of the standard when IFRS 4 phase 2 will be applied;

❚ two significant amendments for the user of financial

statements in a short period. The E.D. proposed the introduction of options within the new IFRS 4:1. the Overlay approach, that allows the companies

that issue insurance contracts to remove from profit or loss the incremental volatility caused by changes in the measurement of financial assets upon appli-cation of IFRS 9. An entity that applies this approach shall reclassify in the other comprehensive income the difference between:a) the amount reported in profit or loss of the finan-

cial assets linked to insurance liabilities in the scope of IFRS 4; and

b) the amount that it would be reported in profit or loss, in application of IAS 39 “Financial Instru-ments: Recognition and Measurement”;

2. the Deferral approach, an optional temporary ex-emption from applying IFRS 9 that would be availa-ble to companies whose predominant activities is to issue insurance contracts. Such a deferral would be available until the new Insurance Contracts Stand-ard comes into effect (but after 1 January 2021).

The Group considers the Deferral approach as most ap-propriate to solve the problems resulting from the appli-cation of IFRS 9 before the new accounting standard on insurance liabilities. The overlay approach implementa-tion would create incremental costs compared to those of the first implementation of IFRS 9. In particular, the Group has identified critical points related to the align-ment and reconciliation of data arising from the simulta-neous application of IAS 39 and IFRS 9.

IFRS 4 – Insurance Contracts (Exposure draft)

On 20 June 2013, the IASB published the exposure draft “Insurance Contracts” . The E.D. proposes a new model for the measurement of insurance contracts that will replace the current IFRS 4 - Insurance Contracts. The valuation method is structured on a Building Block Approach based on the expected value of future cash flows, weighted by the probability of occurrence, on a risk adjustment and on a margin for the services pro-vided within the contract (“contractual service margin”). The contractual service margin is a component of the compensation that the insurer requires for its activity, that is characterized by uncertainty and various types of risk. A simplified approach (“Premium Allocation Ap-proach”) is permitted if the coverage period of the con-tract is less than one year, or if the model used for the

assessment provides a reasonable approximation com-pared to the building block approach. The effective date is three years after the publication of the final standard. Early application is permitted.

The IFRS 4 provides a completely new valuation mod-el for insurance contracts. The Group is evaluating the impacts of proposed amendments which, at an early stage, could be material but not assessable at the mo-ment.

IFRS 15 – Revenue from contracts with customers

On 28 May 2014, the IASB published the IFRS15 “Reve-nue from contracts with customers”, whose objective is revenue recognition. Insurance contracts are out of the scope of this principle, and for this reason the Group is not expecting any significant impacts. The standard is effective from annual periods beginning on 1 January 2018, following the deferral of effective date by the IASB, previously established at 1 January 2017.

Other changes not significant for the Group

Amendment Effective date Date of publication

Amendments to IAS 19: Defined Benefit Plans:Employee Contributions 1 July 20141 November 2013

Amendments resulting from Annual Improvements 2010-2012 Cycle 1 July 20142 December 2013

IFRS 14 Regulatory Deferral Account 1 January 2016 January 2014

IFRS 11 Amendments regarding the accounting for acquisitionof an interest in a joint operation 1 January 2016 May 2014

IAS 16 and IAS 38 Amendments regarding the clarification of acceptable methods of depreciation and amortization 1 January 2016 May 2014

IFRS 10 Amendments regarding the sale and the contribution of assets between an investor and its associate or joint venture 1 January 2016 September 2014

IAS 28 Amendments regarding the sale and the contribution of assets between an investor and its associate or joint venture 1 January 2016 September 2014

Amendments resulting from 2014 Annual Improvements 2012-2014 Cycle 1 January 2016 September 2014

IAS 1 Amendments resulting from the disclosure initiative 1 January 2016 December 2014

1 The Regulation (EU) 2015/29 postponed the effective date for the EU countries to annual periods beginning on or after 1 February 2015.

2 The Regulation (EU) 2015/28 postponed the effective date for the EU countries to annual period beginning on or after 1 February 2015.

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Balance Sheet - Assets

Intangible assets

In accordance with IAS 38, an intangible asset is recog-nised if, and only if, it is identifiable and controllable and it is probable that the expected future economic bene-fits attributable to the asset will flow to the company and the cost of the asset can be measured reliably.

This category includes goodwill and other intangible assets, such as goodwill recognised in the separate fi-nancial statements of the consolidated companies, soft-ware and purchased insurance portfolio.

Goodwill

Goodwill is the sum of future benefits not separately identifiable in a business combination. At the date of ac-quisition, the goodwill is equal to the excess between the sum of the consideration transferred, including con-tingent consideration, liabilities assumed towards the previous owners the fair value of non-controlling inter-ests as well as, in a business combination achieved in stages, the fair value of the acquirer’s previously held equity interest in the acquiree and the fair value (present value) of net amount of the separately identifiable assets and liabilities acquired.

After initial recognition, goodwill is measured at cost less any impairment losses and it is no longer amor-tised. According to IAS 36, goodwill is not subject to amortization. Realized gains and losses on investments in subsidiaries include the related goodwill. Goodwill is tested at least annually in order to identify any impair-ment losses.

The purpose of the impairment test on goodwill is to identify the existence of any impairment losses on the carrying amount recognised as intangible asset. In this context, cash-generating units to which the goodwill is allocated are identified and tested for impairment. Cash-generating units (CGU) units usually represent the consolidated units within the same primary segment in each country. Any impairment is equal to the difference, if negative, between the carrying amount and the re-coverable amount, which is the higher between the fair

value of the cash-generating unit and its value in use, i.e. the present value of the future cash flows expected to be derived from the cash-generating units. The fair value of the CGU is determined on the basis of current market quotation or usually adopted valuation tech-niques (mainly DDM or alternatively embedded value or appraisal value). The Dividend Discount Model is a variant of the Cash flow method. In particular the Divi-dend Discount Model, in the excess capital methodolo-gy, states that the economic value of an entity is equal to the discounted dividends flow calculated considering the minimum capital requirements. Such models are based on projections on budgets/forecasts approved by management or conservative or prudential assumptions covering a maximum period of five years. Cash flow pro-jections for a period longer than five years are extrapo-lated using estimated among others growth rates. The discount rates reflect the free risk rate, adjusted to take into account specific risks.

Should any previous impairment losses no longer exist, they cannot be reversed.

For further details see paragraph “Information on con-solidation perimeter and Group companies” in the Notes.

Other intangible assets

Intangible assets with finite useful life are measured at acquisition or production cost less any accumulated amortisation and impairment losses. The amortisation is based on the useful life and begins when the asset is available for use. Specifically, the purchased software expenses are capitalised on the basis of the cost for purchase and usage. The costs related to their devel-opment and maintenance are charged to the profit and loss account of the period in which they are incurred.

Other intangible assets with indefinite useful life are not subject to amortization. They are periodically tested for impairment.

Gains or losses arising from de-recognition of an intan-gible asset are measured as the difference between the net disposal proceeds and the carrying amount of the asset and are recognised in the income statement when the asset is de-recognised.

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Contractual relations with customers - insurance contracts acquired in a business combination or portfolio transfer

In case of acquisition of life and non-life insurance con-tract portfolios in a business combination or portfolio transfer, the Group recognises an intangible asset, i.e. the value of the acquired contractual relationships (Val-ue Of Business Acquired).

The VOBA is the present value of the pre-tax future profit arising from the contracts in force at the purchase date, taking into account the probability of renewals of the one year contracts in the non-life segment. The related deferred taxes are accounted for as liabilities in the con-solidated balance sheet.

The VOBA is amortised over the effective life of the con-tracts acquired, by using an amortization pattern reflect-ing the expected future profit recognition. Assumptions used in the development of the VOBA amortization pat-tern are consistent with the ones applied in its initial measurement. The amortization pattern is reviewed on a yearly basis to assess its reliability and, if applicable, to verify the consistency with the assumptions used in the valuation of the corresponding insurance provisions.

The difference between the fair value of the insurance contracts acquired in a business combination or a port-folio transfer, and the insurance liabilities measured in accordance with the acquirer’s accounting policies for the insurance contracts that it issues, is recognised as intangible asset and amortised over the period in which the acquirer recognises the corresponding profits.

The Generali Group applies this accounting treatment to the insurance liabilities assumed in the acquisition of life and non-life insurance portfolios.

The future VOBA recoverable amount is nonetheless tested on yearly basis.

As for as the life and non-life portfolios, the recoverable amount of the value of the in force business acquired is carried out through the liability adequacy test (LAT) of the insurance provisions — mentioned in the paragraph related to life and non-life insurance provisions— tak-ing into account, if any, the deferred acquisition costs recognised in the balance sheet. If any, the impairment losses are recognised in the profit or loss account and cannot be reversed in a subsequent period.

Similar criteria are applied for the initial recognition, the amortization and the impairment test of other contractu-al relationships arising from customer lists of asset man-agement sector, acquired in a business combination where the acquiree belongs to the financial segment.

Tangible assets

This item comprises land and buildings used for own ac-tivities and other tangible assets.

Land and buildings (self-used)

In accordance with IAS 16, this item includes land and buildings used for own activities. Land and buildings (self-used) are measured applying the cost model set out by IAS 16.

The cost of the self-used property comprises purchase price and any directly attributable expenditure. The de-preciation is systematically calculated applying specific economic/technical rates which are determined locally in accordance with the residual value over the useful economic life of each individual component of the prop-erty.

Land and buildings (self-used) are measured at cost less any accumulated depreciation and impairment losses. Land and agricultural properties are not depreciated but periodically tested for impairment losses. Costs, which determine an increase in value, in the functionality or in the expected useful life of the asset, are directly charged to the assets to which they refer and depreciated in ac-cordance with the residual value over the assets’ use-ful economic life. Cost of the day-to-day servicing are charged to the profit and loss account.

Finance leases of land and buildings are accounted for in conformity with IAS 17 and require that the overall cost of the leasehold property is recognised as a tan-gible asset and, as a counter-entry, the present value of the minimum lease payments and the redemption cost of the asset are recognised as a financial liability.

Other tangible assets

Property, plant, equipment, furniture and property in-ventories are classified in this item as property invento-

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To measure the value of land and buildings (investment properties), the Generali Group applies the cost model set out by IAS 40, and adopts the depreciation criteria defined by IAS 16. Please refer to the paragraph on land and buildings (self-used) for information about criteria used by the Group and finance leases of land and build-ings.

Investments in subsidiaries, associated companies and joint ventures

This item includes investments in subsidiaries and asso-ciated companies valued at equity or at cost. Immaterial investments in subsidiaries and associated companies, as well as investments in associated companies and in-terests in joint ventures valued using the equity method belong to this category.

A list of such investments is shown in attachment to this Consolidated financial statement.

Financial investments – classification and measurement

Financial Instruments included in scope of IAS 39 are classified as follows:❚ Held to maturity❚ Loans and receivables❚ Available for sale financial assets❚ Financial assets at fair value through profit or loss

The classification depends on the nature and purpose of holding financial instruments and is determined at initial recognition except for allowed reclassifications in rare circumstances and when the purpose of holding the fi-nancial assets changes.

The financial investments are initially recognized at fair value plus, in the case of instruments not measured at fair value through profit or loss, the directly attributable transactions costs.

Non-derivative financial assets with fixed and determi-nable payments, those that the entity has the intention and the ability to hold to maturity, unquoted and not available for sale are subsequently measured at amor-tised cost.

ry. They are initially measured at cost and subsequently recognised net of any accumulated depreciation and impairment losses. They are systematically depreciat-ed on the basis of economic/technical rates determined in accordance with their residual value over their useful economic life.

In particular the inventories are measured at the lower of cost (including cost of purchase, cost of conversion and cost incurred the inventories to their present loca-tion and condition) and net realizable value, i.e. the es-timated selling price in the ordinary course of business less the estimated cost of completion and costs to sell.

An item of property, plant and equipment and any sig-nificant part initially recognised is de-recognised upon disposal or when no future economic benefits are ex-pected from its use or disposal. Any gain or loss aris-ing on de-recognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in the income statement when the asset is de-recognised.

The residual values, useful lives and methods of depre-ciation of property, plant and equipment are reviewed at each financial year end and adjusted prospectively, if appropriate.

Reinsurance provisions

The item comprises amounts ceded to reinsurers from insurance provisions that fall under IFRS 4 scope. They are accounted for in accordance with the accounting principles applied to direct insurance contracts.

Investments

Land and buildings (investment properties)

In accordance with IAS 40, this item includes land and buildings held to earn rentals or for capital appreciation or both. Land and buildings for own activities and prop-erty inventories are instead classified as tangible assets. Furthermore, assets for which the sale is expected to be completed within one year are classified as non-current assets or disposal groups classified as held for sale.

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financial assets are de-recognised or impaired as well as through the normal amortization process envisaged by the amortised cost principle.

Available for sale financial assets

Available for sale financial assets are accounted for at the settlement date at the fair value at the related trans-action dates, plus the transaction costs directly attribut-able to the acquisition.

The unrealized gains and losses on available for sale financial assets arising out of subsequent changes in value are recognised in other comprehensive income in a specific reserve until they are sold or impaired. At this time the cumulative gains or losses previously recog-nised in other comprehensive income are accounted for in the profit and loss account.

This category includes quoted and unquoted equities, investment fund units (IFU) not held for trading, nor des-ignated as financial assets at fair value through profit or loss, and bonds, mainly quoted, designated as available for sale.

Interests on debt financial instruments classified as available for sale are measured using the effective in-terest rate with impact on profit or loss. Dividends re-lated to equities classified in this category are reported in profit or loss when the shareholder’s right to receive payment is established, which usually coincides with the shareholders’ resolution.

The Group evaluates whether the ability and intention to sell its Available for sale financial assets in the near term is still appropriate. When, in rare circumstances, the Group is unable to trade these financial assets due to inactive markets and management’s intention to do so significantly changes in the foreseeable future, the Group may elect to reclassify these financial assets. Reclassification to loans and receivables is permitted when the financial assets meet the definition of loans and receivables and the Group has the intent and ability to hold these assets for the foreseeable future or until maturity. Reclassification to the held to maturity catego-ry is permitted only when the entity has the ability and intention to hold the financial asset accordingly.

For a financial asset reclassified from the available-for sale category, the fair value carrying amount at the date

Held to maturity investments

The category comprises the non-derivative financial as-sets with fixed or determinable payments and fixed ma-turity that a company has the positive intention and abil-ity to hold to maturity, other than loans and receivables and those initially designated as at fair value through profit or loss or as available for sale. The intent and abil-ity to hold investments to maturity must be demonstrat-ed when initially acquired and at each reporting date.In the case of an early disposal (significant and not due to particular events) of said investments, any remaining investments must be reclassified as available for sale.

Held to maturity investments are accounted for at settle-ment date and measured initially at fair value and sub-sequently at amortised cost using the effective interest rate method and considering any discounts or premi-ums obtained at the time of the acquisition which are accounted for over the remaining term to maturity.

Loans and receivables

This category comprises non-derivative financial assets with fixed or determinable payments, not quoted in an active market. It does not include financial assets held for trading and those designated as at fair value through profit or loss or as available for sale upon initial recog-nition.

In detail, the Generali Group includes in this category some unquoted bonds, mortgage loans, policy loans, term deposits with credit institutions, deposits under reinsurance business accepted, repurchase agree-ments, receivables from banks or customers account-ed for by companies of the financial segment, and the mandatory deposit reserve with the central bank. The Group’s trade receivables are instead classified as other receivables in the balance sheet.

Loans and receivables are accounted for at settlement date and measured initially at fair value and subsequent-ly at amortised cost using the effective interest rate method and considering any discounts or premiums ob-tained at the time of the acquisition which are account-ed for over the remaining term to maturity. Short-term receivables are not discounted because the effect of discounting cash flows is immaterial. Gains or losses are recognised in the profit and loss account when the

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and management’s intention to sell them in the foresee-able future significantly changes, the Group may elect to reclassify them. The reclassification to loans and re-ceivables, Available for sale or held to maturity depends on the nature of the asset. This evaluation does not af-fect any financial assets designated at fair value through profit or loss using the fair value option at designation, as these instruments cannot be reclassified after initial recognition.

Derecognition

A financial asset (or, where applicable, a part of a finan-cial asset or part of a group of similar financial assets) is de-recognised when:❚ The rights to receive cash flows from the asset have

expired;❚ The Group has transferred its rights to receive cash

flows from the asset or has assumed an obligation to pay the received cash flows in full without mate-rial delay to a third party under a ‘pass-through’ ar-rangement; and either (a) the Group has transferred substantially all the risks and rewards of the asset, or (b) the Group has neither transferred nor retained sub-stantially all the risks and rewards of the asset, but has transferred control of the asset.

When the Group has transferred its rights to receive cash flows from an asset or has entered into a pass-through arrangement, it evaluates if and to what extent it has retained the risks and rewards of ownership. When it has neither transferred nor retained substantially all of the risks and rewards of the asset, nor transferred control of the asset, the asset is recognised to the ex-tent of the Group’s continuing involvement in the asset. In that case, the Group also recognises an associated liability. The transferred asset and the associated liabil-ity are measured on a basis that reflects the rights and obligations that the Group has retained. Continuing in-volvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Group could be required to re-pay.

of reclassification becomes its new amortised cost and any previous gain or loss on the asset that has been recognised in equity is amortised to profit or loss over the remaining life of the investment using the EIR. Any difference between the new amortised cost and the ma-turity amount is also amortised over the remaining life of the asset using the EIR. If the asset is subsequently determined to be impaired, then the amount recorded in equity is reclassified to the income statement.

Financial assets at fair value through profit or loss

This category comprises financial assets held for trad-ing, i.e. acquired mainly to be sold in a short term, and financial assets that upon initial recognition are desig-nated as at fair value through profit or loss.

In particular both bonds and equities, mainly quoted, and all derivative assets, held for both trading and hedg-ing purposes, are included in this category.

Financial assets at fair value through profit or loss also take into account investments back to policies where the investment risk is borne by the policyholders and back to pension funds in order to significantly reduce the val-uation mismatch between assets and related liabilities.

Structured instruments, whose embedded derivatives cannot be separated from the host contracts, are clas-sified as financial assets at fair value through profit or loss.

The financial assets at fair value through profit or loss are accounted for at settlement date and are measured at fair value. Their unrealized and realized gains and losses at the end of the period are immediately account-ed for in the profit and loss account.

The Group evaluates its financial assets held for trad-ing, other than derivatives, to determine whether the intention to sell them in the near term is still appropri-ate. When, in rare circumstances, the Group is unable to trade these financial assets due to inactive markets

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They are measured at the lower of their carrying amount and fair value less costs to sell.

Discontinued operations are excluded from the results of continuing operations and are presented as a single amount in profit or loss after tax from discontinued op-erations in the income statement.

Deferred acquisition costs

Concerning deferred acquisition costs, according to requirements of IFRS 4, the Group continued to apply accounting policies prior to the transition to international accounting principles. In this item acquisition costs paid before the subscription of multi-year contracts to am-ortize within the duration of the contracts are included.

Deferred tax assets

Deferred tax assets are recognized for deductible tem-porary differences between the carrying amounts of assets and liabilities and the corresponding amounts recognized for tax purposes.

In the presence of tax losses carried forward or unused tax credits, deferred tax assets are recognized to the extent that it is probable that future taxable profit will be available against which the aforementioned tax losses or unused tax credits.

Deferred tax relating to items recognised outside prof-it or loss is recognised outside profit or loss. Deferred tax items are recognised in correlation to the underlying transaction either in other comprehensive income or di-rectly in equity

Deferred tax assets and deferred tax liabilities are off-set if a legally enforceable right exists to offset current tax assets against current income tax liabilities and the deferred taxes relate to the same taxable entity and the same taxation authority.

Deferred tax assets are measured at the tax rates that are expected to be applied in the year when the asset is realized, based on information available at the reporting date

Receivables

This item includes receivables arising out of direct insur-ance and reinsurance operations, and other receivables

Receivables arising out of direct insurance and reinsurance operations

Receivables on premiums written in course of collection and receivables from intermediates and brokers, co-in-surers and reinsurers are included in this item. They are accounted for at their fair value at acquisition date and subsequently at their presumed recoverable amounts.

Other receivables

This item includes all other receivables, which do not have an insurance or tax nature. They are accounted for at fair value at recognition and subsequently at their pre-sumed recoverable amounts

Other assets

Non-current assets or disposal groups classified as held for sale, deferred acquisition costs, tax receivables, de-ferred tax assets, and other assets are classified in this item.

Non-current assets or disposal groups classified as held for sale

This item comprises non-current assets or disposal groups classified as held for sale under IFRS 5.

Non-current assets and disposal groups are classified as held for sale if their carrying amounts will be recov-ered principally through a sale transaction rather than through continuing use. The criteria for held for sale classification is regarded as met only when the sale is highly probable and the asset or disposal group is avail-able for immediate sale in its present condition.

Management must be committed to the sale, which should be expected to qualify for recognition as a com-pleted sale within one year from the date of classification

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comprises deferred commissions for investment man-agement services related to investment contracts.

Deferred fee and commission expenses include acquisi-tion commissions related to investment contracts with-out DPF fair valued as provided for by IAS 39 as financial liabilities at fair value through profit or loss. Acquisition commissions related to these products are accounted for in accordance with the IAS 18 treatment of the in-vestment management service component. They are recognised along the product life by reference to the stage of completion of the service rendered. Therefore, acquisition commissions are incremental costs recog-nised as assets, which are amortised throughout the whole policy term on a straight line approach, reasona-bly assuming that the management service is constantly rendered.

Deferred commissions for investment management ser-vices are amortised, after assessing their recoverability in accordance with IAS 36.

Cash and cash equivalents

Cash in hand and equivalent assets, cash and balances with banks payable on demand and with central banks are accounted for in this item at their carrying amounts.

Short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value are included in this item. Investments are qualified as cash equivalents only when they have a short maturity of 3 months or less from the date of the acquisition.

Deferred tax assets are not recognized in the following cases provided in paragraph 24 of IAS 12:❚ when the deferred tax asset relating to the deductible

temporary difference arises from the initial recogni-tion of an asset or liability in a transaction that is not a business combination and, at the time of the transac-tion, affects neither the accounting profit nor taxable profit or loss

❚ x\in respect of deductible temporary differences as-sociated with investments in subsidiaries, associates and interests in joint ventures, deferred tax assets are recognised only to the extent that it is probable that the temporary differences will reverse in the foresee-able future and taxable profit will be available against which the temporary differences can be utilized.

❚ for all deductible temporary differences between the carrying amount of assets or liabilities and their tax base to the extent that it is probable that taxable in-come will be available, against which the deductible temporary differences can be utilised

Tax receivables

Receivables related to current income taxes as defined and regulated by IAS 12 are classified in this item. They are accounted for based on the tax laws in force in the countries where the consolidated subsidiaries have their offices.

Current income tax relating to items recognised directly in equity are recognised in equity and not in the income statement.

Other assets

The item mainly includes accrued income and prepay-ments, specifically accrued interest from bonds. It also

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derive from accounting for transactions in foreign cur-rencies and from the translation of subsidiaries’ financial statements denominated in foreign currencies.

Reserve for unrealised gains and losses on available for sale financial assets

The item includes gains or losses arising from changes in the fair value of available for sale financial assets, as previously described in the corresponding item of finan-cial investments.

The amounts are accounted for net of the related de-ferred taxes and deferred policyholder liabilities.

Reserve for other unrealised gains and losses through equity

The item includes the cash flow hedging derivatives reserve, the reserve for hedges of net investments in foreign operations. This item includes gains or losses on cash flow hedging instruments and gains or losses on hedging instruments of a net investment in a foreign operation. In addition, this item also includes the prof-its and losses relating to defined benefit plans and the part of the balance sheet reserves whose the variation is part of the comprehensive income of participations and those relating to non-current assets or disposal groups classified as held for sale.

Result of the period

The item refers to the Group consolidated result of the period. Dividend payments are accounted for after the approval of the shareholders’ general meeting.

Shareholder’s equity attributable to minority interests

The item comprises equity instruments attributable to minority interests.

It also includes the reserve for unrealized gains and losses on available for sale investments and any other gains or losses recognized directly in equity attributable to minority interests.

Balance sheet – Liabilities and equity

Shareholder’s equity

Shareholder’s equity attributable to the Group

Share capital

Ordinary shares are recognized as share capital and their value equals the nominal value.La voce è destinata ad accogliere categorie speciali di azioni ed eventuali componenti rappresentative di capi-tale comprese in strumenti finanziari composti.

Other equity instruments

The item includes preference shares and equity compo-nents of compound financial instruments.

Capital reserve

The item includes the share premium account of the Parent Company.

Revenue reserve and other reserves

The item comprises retained earnings or losses adjusted for the effect of changes arising from the first-time appli-cation of IAS/IFRS, reserves for share-based payments, equalisation and catastrophe provisions not recognised as insurance provisions according to IFRS 4, legal re-serves envisaged by the Italian Civil Code and special laws before the adoption of IAS, as well as reserves from the consolidation process.

Own shares

As provided for by IAS 32, the item includes equity instruments of the Parent company held by the same company or by its consolidated subsidiaries

Reserve for currency translation differences

The item comprises the exchange differences to be recognised in equity in accordance with IAS 21, which

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with previous local GAAP. Gross premiums are recog-nised as a revenue, net of cancellations of the period, and ceded premiums are recognised as expenses of the period.

Shadow accounting

In order to mitigate the valuation mismatch between fi-nancial investments carried at fair value according to IAS 39 and insurance provisions which are accounted for in accordance with previous local GAAP, shadow account-ing is applied to insurance contracts and investments contracts with DPF. This accounting practice attributes to the policyholders part of the difference between IAS/IFRS valuation of the basis on which the profit sharing is determined and valuation which is used to determine the profit sharing actually paid.

The policyholders’ share is calculated on the average contractual percentage for the policyholder participa-tion, as the local regulation already foresees the protec-tion of guaranteed obligations through the recognition of additional provisions for interest rate risk if future fi-nancial returns based on a proper time horizon are not sufficient to cover the financial guaranties included in the contract.

The accounting item arising from the shadow account-ing application is included in the carrying amount of insurance liabilities whose adequacy is tested by the liability adequacy test (LAT) according to IFRS 4 (refer to paragraph Details on insurance and investment con-tracts), to rectify the IAS/IFRS carrying amount of insur-ance provisions.

The main accounting effect of the shadow accounting is double fold: on the one hand, the recognition of the policyholders’ share of unrealized gains and losses on available for sale financial assets in the deferred poli-cyholders’ liabilities; on the other, the insurer’s share is recognised in equity. If financial instruments are fair val-ued through profit or loss or financial investments are impaired, the policyholders’ share on the difference be-tween the market value and valuation used to determine the return which the profit sharing is based on (e.g. the carrying amount in segregated fund) is recognised in the profit and loss account.

Provisions

Provisions for risks and charges are provided only when it is deemed necessary to respond to an obligation (legal or implicit) arising from a past event and it is probable that an outflow of resources whose amount can be reli-ably estimated, as required by IAS 37.

Insurance provisions

This item comprises amounts, gross of ceded reinsur-ance, of liabilities related to insurance contracts and investment contracts with discretionary participation features..

Life insurance policies

In accordance with IFRS 4, policies of the life segment are classified as insurance contracts or investment con-tracts based on the significance of the underlying insur-ance risk.

Classification requires the following steps:❚ identification of the characteristics of products (op-

tion, discretionary participation feature, etc.) and ser-vices rendered;

❚ determination of the level of insurance risk in the con-tract; and

❚ application of the international principle.

Insurance contracts and investment contracts with DPF

Premiums, payments and change in the insurance pro-vision related to products whose insurance risk is con-sidered significant (e.g. term insurance, whole life and endowment with annual premiums, life contingent an-nuities and contracts containing an option to elect at maturity a life contingent annuity at rates granted at inception, long-term health insurance and unit-linked with sum assured in case of death significantly higher than the value of the fund) or investment contracts with discretionary participation feature –DPF – (e.g. policies linked to segregated funds, contracts with additional benefits that are contractually based on the economic result of the company) are accounted for in accordance

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est rates or mortality, are classified as provisions for the liability adequacy test.

As previously mentioned, insurance provisions include deferred policyholder liabilities related to contracts with DPF. The recognition of the deferred policyholder liabil-ities is made in accordance to shadow accounting, as already mentioned in paragraph “Shadow accounting” of section Insurance Provision.

Liability adequacy test (LAT)

In accordance with IFRS 4, in order to verify the ade-quacy of the reserves a Liability Adequacy Test (LAT) is performed. The aim of the test is to verify if the technical provisions - inclusive of deferred policyholders liabilities - are adequate to cover the current value of future cash flows related to insurance contracts.

The liability adequacy test is performed through the comparison of the IFRS reserves (which include the impact of “shadow accounting”), net of any deferred acquisition costs or intangible assets related to these contracts, with the current value of future cash flows re-lated to insurance contracts. A risk margin, estimated according to the cost of capital approach, is added.

The abovementioned amount also includes the costs of embedded financial options and guarantees, which are measured with a market-consistent methodology. Tech-nical reserves which are subject to the Liability Adequa-cy Test also include the interest rate risk provisions as required by local regulations.

The insurance contracts modelling and best estimates assumptions used are consistent with the already es-tablished Group Embedded Value methodology carried out by the Group for several years and are reviewed by an independent third subject.

Each inadequacy is charged to the profit and loss ac-count, initially reducing deferred acquisition costs and value of business acquired, and subsequently account-ing for a provision.

Non-life insurance provisions

The local GAAP for each country is applied to non-life insurance provisions, since all the existing policies fall under IFRS 4 scope. In conformity with the international

Investment contracts

Investment contracts without DPF and that do not have a significant investment risk, mainly include unit/index-linked policies and pure capitalization contracts. These products are accounted for in accordance with IAS 39 as follows:❚ the products are recognised as financial liabilities at

fair value or at amortised cost. In detail, linked prod-ucts classified as investment contracts are fair valued through profit or loss, while pure capitalization poli-cies are generally valued at amortised cost;

❚ fee and commission income and expenses are rec-ognised in the profit and loss account. Specifically, IAS 39 and IAS 18 require that they are separately identified and classified in the different components of: (i) origination, to be charged in the profit and loss account at the date of the issue of the product; and (ii) investment management service, to be recognised throughout the whole policy term by reference to the stage of completion of the service rendered;

❚ fee and commission income and incremental costs of pure capitalization contracts without DPF (other than administration costs and other non-incremental costs) are included in the amortised cost measurement;

❚ the risk component of linked products is unbundled, if possible, and accounted for as insurance contracts.

Life insurance provisions

Life insurance provisions are related to insurance con-tracts and investment contracts with discretionary par-ticipation features. These provisions are accounted for based on local GAAP, in compliance with IFRS 4.

Liabilities related to insurance contracts and investment contracts with discretionary participation features are determined analytically for each kind of contract on the basis of appropriate actuarial assumptions. They meet all the existing commitments based on best estimates.

These actuarial assumptions take into consideration the most recent demographic tables of each country where the risk is underwritten, aspects of mortality, mor-bidity, determination of risk-free rates, expenses and in-flation. The tax charge is based on laws in force.

Among life insurance provisions, provisions in addition to mathematical provisions, already envisaged by the local regulations in case of adverse changes in the inter-

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This item comprises both subordinated liabilities, which, in the case of bankruptcy, are to be repaid only after the claims of all other creditors have been met, and hybrid instruments.

Bond instruments issued are measured at issue price, net of costs directly attributed to the transaction. The difference between the aforesaid price and the reim-bursement price is recognised along the duration of the issuance in the profit and loss account using the effec-tive interest rate method.

Furthermore, it includes liabilities to banks or custom-ers, deposits received from reinsurers, bonds issued, other loans and financial liabilities at amortised cost re-lated to investment contracts that do not fall under IFRS 4 scope.

Derecognition

A financial liability is derecognised when the obligation under the liability is discharged or cancelled, or expires.

When an existing financial liability is replaced by an-other from the same lender on substantially different terms, or the terms of an existing liability are substan-tially modified, such an exchange or modification is treated as the derecognition of the original liability and the recognition of a new liability. The difference in the respective carrying amounts is recognised in the in-come statement.

Payables

Payables arising out insurance operations

The item includes payables arising out of insurance and reinsurance operations.

Other payables

This item mainly includes provisions for the Italian ”trat-tamento di fine rapporto” (employee severance pay). These provisions are accounted for in accordance with IAS 19 (see paragraph 25 Other liabilities).

standard, no provisions for future claims are recognised, in line with the derecognition of the equalisation and ca-tastrophe provisions and some additional components of the unearned premiums provisions, carried out on the date of the first-time application.

The provisions for unearned premiums includes the pro-rata temporis provision, which is the amount of gross premiums written allocated to the following finan-cial periods, and the provision for unexpired risks, which provides for claims and expenses in excess of the relat-ed unearned premiums.

The provisions for outstanding claims are determined by a prudent assessment of damages, based on objective and prospective considerations of all predictable charg-es. Provisions are deemed adequate to cover payments of damages and the cost of settlement of claims re-lated to accident occurred during the year but not yet reported.

The non-life insurance provisions meets the require-ments of the liability adequacy test according to IFRS 4.

Amounts ceded to reinsurers from insurance provisions are determined in accordance with the criteria applied for the direct insurance and accepted reinsurance.

Financial liabilities

Financial liabilities at fair value through profit or loss and financial liabilities at amortised cost are included in this item.

Financial liabilities at fair value through profit or loss

The item refers to financial liabilities at fair value through profit or loss, as defined and regulated by IAS 39. In de-tail, it includes the financial liabilities related to invest-ment contracts where the investment risk is borne by the policyholders as well as derivative liabilities.

Other financial liabilities

The item includes financial liabilities within the scope of IAS 39 that are not classified as at fair value through profit or loss and are instead measured at amortised cost.

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Tax payables

The item includes payables due to tax authorities for current taxes. Current income tax relating to items rec-ognised directly in equity is recognised in equity and not in the income statement.

Other liabilities

This item includes provisions for defined benefit plans, such as termination benefit liabilities and other long-term employee benefits (the Italian provision for “trat-tamento di fine rapporto” is excluded and classified as other payables). In compliance with IAS 19, these provi-sions are measured according to the project unit credit method. This method implies that the defined benefit liability is influenced by many variables, such as mortal-ity, employee turnover, salary trends, expected inflation, expected rate of return on investments, etc. The liability recognised in the balance sheet represents the net pres-ent value of the defined benefit obligation less the fair value of plan assets (if any), adjusted for any actuarial gains and losses and any past service costs not amor-tised. The rate used to discount future cash flows is de-termined by reference to market yields on high-quality corporate bonds. The actuarial assumptions are period-ically tested to confirm their consistency. The actuarial gains and losses arising from subsequent changes in variables used to make estimates are recognised shall be accounted for in other comprehensive income with-out any possibility of recycling to profit and loss.

Deferred fee and commission income includes acqui-sition loadings related to investment contracts without DPF, which are classified as financial liabilities at fair val-ue through profit or loss, according to IAS 39.

Acquisition loadings related to these products are ac-counted for in accordance with IAS 18 treatment of the investment management service component during the product life. They are recognised by reference to the stage of completion of the service rendered.

Therefore, the acquisition commissions have been re-classified in the balance sheet, as liabilities to be re-leased to the profit and loss account during the life of the product.

Other liabilities

The item comprises liabilities not elsewhere account-ed for. In detail, it includes liabilities directly associated with non-current assets and disposal groups classified as held for sale, tax payables and deferred tax liabilities and deferred fee and commission income.

Liabilities directly associated with non-current assets and disposal groups classified as held for sale

The item includes liabilities directly associated with non-current assets and disposal groups classified as held for sale, as defined by IFRS 5.

Deferred tax liabilities

Deferred tax liabilities are recognised for all taxable temporary differences between the carrying amount of assets and liabilities and their tax base, Deferred tax li-abilities are measured at the tax rates that are expected to be applied in the year when temporary differences will be taxable, are based on the tax rates and tax laws enacted or substantively enacted at the reporting date.

Deferred tax relating to items recognised outside prof-it or loss is recognised outside profit or loss. Deferred tax items are recognised in correlation to the underlying transaction either in other comprehensive income or di-rectly in equity.

Deferred tax assets and deferred tax liabilities are off-set if a legally enforceable right exists to set off current tax assets against current income tax liabilities and the deferred taxes relate to the same taxable entity and the same taxation authority.

Deferred tax liabilities are not recognized in the following cases provided for in paragraph 15 of IAS 12:❚ When the deferred tax liability arises from the initial

recognition of goodwill or an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the ac-counting profit nor taxable profit or loss

❚ In respect of taxable temporary differences associ-ated with investments in subsidiaries, associates and interests in joint ventures, when the timing of the re-versal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future.

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Other income

The item includes: revenue arising from sale of goods and rendering of services other than financial services; other insurance income; gains on foreign currency ac-counted for under IAS 21; realized gains and reversals of impairment on tangible assets and other assets; and any gains recognised on the re-measurement of non-current assets or disposal groups classified as held for sale.

Expenses

Net insurance benefit and claims

The item includes the amounts paid in respect of claims occurring during the period, maturities and surrenders, as well as the amounts of changes in insurance provi-sions that fall under IFRS 4 scope, net of recoveries and reinsurance. It also comprises changes in the provision for deferred policyholders liabilities with impact on the profit and loss account.

Fee and commission expenses and expenses from financial service activities

The item includes fee and commission expenses for financial services received by companies belonging to the financial segment and fee and commission expens-es related to investment contracts.

Expenses from subsidiaries, associated companies and joint ventures

The item includes expenses from investments in subsid-iaries, associated companies and joint ventures, which are accounted for in the corresponding asset items of the balance sheet.

Expenses from financial instruments and other instruments

The item comprises expenses from land and buildings (investment properties) and from financial instruments not at fair value through profit or loss. It includes: in-

Profit and loss account

Income

Earned premiums

The item includes gross earned premiums on insurance contracts and investment contracts with discretionary participation features, net of earned premiums ceded.

Fee and commission income

The item includes fee and commission income for finan-cial services rendered by companies belonging to the financial segment and fee and commission income re-lated to investment contracts.

Net income from financial instruments at fair value through profit or loss

The item comprises realized gains and losses, interests, dividends and unrealized gains and losses on financial assets and liabilities at fair value through profit or loss.

Income from subsidiaries, associated companies and joint ventures

The item comprises income from investments in subsid-iaries, associated companies and joint ventures, which are accounted for in the corresponding asset items of the balance sheet.

Income from financial instruments and other investments

The item includes income from financial instruments not at fair value through profit or loss and from land and buildings (investment properties). In detail, it includes mainly interests from financial instruments measured using the effective interest method, other income from investments, including dividends recognised when the right arises, income from properties used by third par-ties, realized gains from financial assets, financial liabil-ities and investment properties and reversals of impair-ment.

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take a substantial period of time to get ready for its in-tended use or sale are capitalised as part of the cost of the asset. All other borrowing costs are expensed in the period in which they occur. Borrowing costs consist of interest and other costs that an entity incurs in connec-tion with the borrowing of funds

Income taxes

The item includes income taxes for the period and for previous years, deferred taxes and tax losses carried back.

Comprehensive income

The statement of comprehensive income was intro-duced by the revised IAS 1 issued in September 2007 by the IASB, approved by the EC Regulation No 1274/2008.

The statement comprises items of income and expens-es different from those included in profit or loss, recog-nised directly in equity other than those changes result-ing from transactions with shareholders. In accordance with the ISVAP (now IVASS) Regulation n.7/2007 as subsequently amended, items of income and expenses are net of taxes as well as net of gains and losses on available for sale assets attributable to the policyholders according to the deferred policyholders liabilities calcu-lation.

The transactions with owners and the result of com-prehensive income are presented in the statement of changes in equity

terest expense; expenses on land and buildings (invest-ment properties), such as general property expenses and maintenance and repair expenses not recognised in the carrying amount of investment properties; realized losses from financial assets, financial liabilities and land and buildings (investment properties); depreciations and impairment of such investments.

Acquisition and administration costs

The item comprises acquisition commissions, other ac-quisition costs and administration costs related to con-tracts that fall under IFRS 4 scope. Other acquisition costs and administration costs related to investment contracts without discretionary participation features are also included, as well as overheads and personnel expenses for investment management, and administra-tion expenses of non-insurance companies.

Other expenses

The item includes: other insurance expenses; allocation to provisions; losses on foreign currency accounted for under IAS 21; realized losses, impairment and depre-ciation of tangible assets not elsewhere allocated; and amortization of intangible assets. It also comprises any loss on the re-measurement of non-current assets or disposal groups classified as held for sale, other than discontinued operations

Capitalization of borrowing costs

Borrowing costs directly attributable to the acquisition, construction or production of an asset that necessarily

ognized in equity, that are reclassified to the profit or loss according to IFRSs(a) g. following the transfer of a financial asset available

for sale).

Transfer

This section comprises the distribution of ordinary or extraordinary dividends, decreases in capital and other reserves (for redemption of shares, equity instruments and distributable reserves, the purchase of own shares, for the reclassification of liabilities previously recognized in equity instruments and, in the consolidated financial statements, for changes in scope of consolidation) and the attribution of profit or loss recognized directly in eq-uity and in other balance sheet items (i.e. gains or losses on cash flow hedging instruments allocated to the car-rying amount of hedged instruments).

Changes in ownership interests

This section comprises the effects capita transaction of the subsidiaries, that do not result in the loss of control

Existence

This section comprises the equity components and gains or losses directly recognized in equity at the end of the reporting period. The statement illustrates all changes net of taxes and gains and losses arising from the valuation of financial assets available forsale, attributable to policyholders and accounted for in the insurance liabilities.

Statement of changes in equity

The statement was prepared in accordance with the re-quirements of the ISVAP (now IVASS). 7 of 13 July 2007 as subsequently amended, and explains all the varia-tions of equity.

Change of the closing balance

This section comprises changes of the closing balance of the previous financial year determined by the correc-tion of errors or changes in accounting policies (IAS 8) and the recognition of gains or losses arising from the first time application of accounting standards (IFRS 1).

Allocation

This section comprises the allocation of the profit or loss of the year, the allocation of the previous year prof-it or loss into the capital reserves, increases in capital and other reserves (for the issuance of new shares, eq-uity instruments, stock options or derivatives on own shares, for the sale of shares pursuant to IAS 32.33, for the reclassification to equity instruments previously recognized in liabilities and, in the consolidated finan-cial statements, for changes in scope of consolidation), changes within equity reserves (es. allocation of surplus capital, stock option exercise, transfer of revaluation re-serves related to tangible and intangible assets to re-tained earnings in accordance with IAS 38.87 and IAS 16.41 etc.), the changes in gains and losses recognized directly in equity.

Reclassification adjustments to profit or loss

This section comprises gains or losses previously rec-

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ments n. 7 of 13 July 2007, as amended by Measure ISVAP (now IVASS) No. 2784 of 8 March 2010, and dis-tinguishing its component items among operating, in-vesting and financing activities.

Cash Flows statement

The report, prepared using the indirect method, is drawn up in accordance with the ISVAP (now IVASS) require-

Other information

Fair value

With effect from 1st January 2013, the Generali Group has implemented IFRS 13 - Fair Value Measurement. This standard provides guidance on fair value measure-ment and requires disclosures about fair value meas-urements, including the classification of financial assets and liabilities in fair value hierarchy levels.

With reference to the investments, Generali Group measures financial assets and liabilities at fair value in the financial statements, or discloses the contrary in the notes.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transac-tion between market participants at the measurement date (exit price). In particular, an orderly transaction takes place in the principal or most advantageous mar-ket at the measurement date under current market con-ditions.

A fair value measurement assumes that the transaction to sell the asset or transfer the liability takes place either:(b) in the principal market for the asset or liability; or(c) in the absence of a principal market, in the most ad-

vantageous market for the asset or liability.

The fair value is equal to market price if market informa-tion are available (i.e. relative trading levels of identical or similar instruments) into an active market, which is defined as a market where the items traded within the market are homogeneous, willing buyers and sellers can normally be found at any time and prices are available to the public.

If there isn’t an active market, a valuation technique should be used which shall maximise the observable inputs. If the fair value cannot be measured reliably, am-ortised cost is used as the best estimate in determining the fair value.

As for measurement and disclosure, the fair value de-pends on the unit of account, depending on whether the asset or liability is a stand-alone asset or liability, a group of assets, a group of liabilities or a group of assets and liabilities in accordance with the related IFRS.

However when determining fair value, the valuation should reflect its use if in combination with other assets.

With reference to non-financial assets, fair value meas-urement of a non-financial asset takes into account a market participant’s ability to generate economic bene-fits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use. The highest and best use of a non-financial asset takes into account the use of the asset that is physically possible, legally per-missible and financially feasible. However, an entity’s current use of a non-financial asset is presumed to be its highest and best use unless market or other factors sug-gest that a different use by market participants would maximise the value of the asset.

For the liabilities, the fair value is represented by the price that would be paid to transfer a liability in an or-derly transaction in the principal (or most advantageous) market at the measurement date under current market conditions (ie an exit price).

When a quoted price for the transfer of an identical or a similar liability or entity’s own equity instrument is not available and the identical item is held by another par-ty as an asset, an entity shall measure the fair value of the liability or equity instrument from the perspective of a market participant that holds the identical item as an asset at the measurement date.

Fair value hierarchy

Assets and liabilities measured at fair value in the con-solidated financial statements are measured and clas-sified in accordance with the fair value hierarchy in

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est rate, yield curves, credit spreads, dividend estimates and foreign exchange rates.

Valuation techniques

Valuation techniques are used when a quoted price is not available or shall be appropriate in the circumstanc-es and for which sufficient data are available to meas-ure fair value, maximising the use of relevant observable inputs and minimising the use of unobservable inputs.

Single or multiple valuation techniques valuation tech-nique will be appropriate. If multiple valuation tech-niques are used to measure fair value, the results shall be evaluated considering the reasonableness of the range of values indicated by those results. A fair value measurement is the point within that range that is most representative of fair value in the circumstances.

Three widely used valuation techniques are:❚ market approach: uses prices and other relevant in-

formation generated by market transactions involving identical or comparable (i.e. similar) assets, liabilities or a group of assets and liabilities;

❚ cost approach: reflects the amount that would be re-quired currently to replace the service capacity of an asset; and

❚ income approach: converts future amounts to a single current (i.e. discounted) amount.

Application to assets and liabilities

❚ Debt securities

Generally, if available and if the market is defined as ac-tive, fair value is equal to the market price.

In the opposite case, the fair value is determined using the market and income approach. Primary inputs to the market approach are quoted prices for identical or com-parable assets in active markets where the comparabili-ty between security and benchmark defines the fair val-ue level. The income approach in most cases means a discounted cash flow method where either the cash flow or the discount curve is adjusted to reflect credit risk and liquidity risk, using interest rates and yield curves commonly observable at frequent intervals. Depending on the observability of these parameters, the security is classified in level 2 or level 3.

IFRS13, which consists of three levels based on the ob-servability of inputs within the corresponding valuation techniques used.

The fair value hierarchy levels are based on the type of inputs used to determine the fair value with the use of adequate valuation techniques, which shall maximize the market observable inputs and limit the use of unob-servable inputs:❚ Level 1 inputs are quoted prices (unadjusted) in active

markets for identical assets or liabilities that the entity can access at the measurement date.

❚ Level 2 inputs other than quoted prices included within Level 1 that are observable for the asset or liability, ei-ther directly or indirectly (i.e. quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability; market-corrobo-rated inputs).

❚ Level 3: inputs are unobservable inputs for the asset or liability, which reflect the assumptions that market participants would use when pricing the asset or lia-bility, including assumptions about risk (of the model used and of inputs used).

The fair value measurement is categorised in its entirety in the same level of the fair value hierarchy as the lowest level input that is significant to the entire measurement. Assessing the significance of a particular input to the entire measurement requires judgement, taking into ac-count factors specific to the asset or liability.

A fair value measurement developed using a present value technique might be categorised within Level 2 or Level 3, depending on the inputs that are significant to the entire measurement and the level of the fair value hierarchy within which those inputs are categorised.

If an observable input requires an adjustment using an unobservable input and that adjustment results in a sig-nificantly higher or lower fair value measurement, the resulting measurement would be categorised within the level attributable to the input with the lowest level utilized.

Adequate controls have been set up to monitor all meas-urements including those provided by third parties. If these checks show that the measurement is not con-sidered as market corroborated the instrument must be classified in level 3. In this case, generally the main in-puts used in the valuation techniques are volatility, inter-

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In the opposite case, the fair value of derivatives is de-termined using internal valuation models or provided by third parties. In particular, the fair value is determined primarily on the basis of income approach using deter-ministic or stochastic models of discounted cash flows commonly shared and used by the market.

The main input used in the valuation include volatility, interest rates, yield curves, credit spreads, dividend es-timates and exchange rates observed at frequent inter-vals.

With reference to the fair value adjustment for credit and debt risk of derivatives (credit and debt valuation adjust-ment CVA / DVA), the Group considered this adjustment as not material for the valuation of its positive and neg-ative derivatives, as almost entirely of them is collater-alized. Their evaluation does not take into account for these adjustments.

❚ Financial assets where the investment risk is borne by the policyholders and related to pension funds

Generally, if available and if the market is defined as active, fair value is equal to the market price. On the contrary, valuation methodologies listed above for the different asset classes shall be used.

❚ Financial liabilities


The fair value is determined primarily on the basis of the income approach using discounting techniques.

In particular, the fair value of debt instruments issued by the Group are valued using discounted cash flow mod-els based on the current marginal rates of funding of the Group for similar types of loans, with maturities consist-ent with the maturity of the debt instruments subject to valuation.

The fair value of other liabilities relating to investment contracts is determined using discounted cash flow models that incorporate several factors, including the credit risk embedded derivatives, volatility, servicing costs and redemptions. In general, however, are subject to the same valuation techniques used for financial as-sets linked policies.

❚ Equity securities


In the opposite case, the fair value is determined using the market and income approach. Primary inputs to the market approach are quoted prices for identical or com-parable assets in active markets where the comparability between security and benchmark defines the fair value level. The income approach in most cases means a dis-counted cash flow method estimating the present value of future dividends. Depending on the observability of these parameters, the security is classified in level 2 or level 3.

❚ Investment fund units


In the opposite case, the fair value of IFU is mainly de-termined using net asset values (NAV) provided by the fund’s managers provided by the subjects responsible for the NAV calculation. This value is based on the valua-tion of the underlying assets carried out through the use of the most appropriate approach and inputs, eventually adjusted for illiquidity. Moreover, depending on how the share value is collected, directly from public providers or through counterparts, the appropriate hierarchy level is assigned. If this NAV equals the price at which the quote can be effectively traded on the market in any moment, the Group considers this value equiparable to the mar-ket price.

❚ Private equity funds and Hedge funds


In the opposite case, the fair value of private equity funds and hedge funds is generally expressed as the net asset value at the balance sheet date, determined using periodical net asset value and audited financial state-ments provided by fund administrators. If at the balance sheet date, such information is not available, the latest official net asset value is used. The fair value of these investments is also closely monitored by a team of pro-fessionals within the Group.

❚ Derivatives


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nized directly in an appropriate item of comprehensive income. The ineffective portion of the gains or loss on the hedging instrument is recognized in profit or loss. If a forecast transaction subsequently results in the rec-ognition of a financial asset or a financial liability, the associated gains or losses that were recognised in other comprehensive income shall be reclassified from equity to profit or loss as a reclassification adjustment.

Hedges of a net investment in a foreign operation are accounted for similarly to cash flow hedges: the effec-tive portion of gain or loss on the hedging instrument is recognized among the components of profit or loss, while the part is not effective be recognized in the sepa-rate income statement.

Impairment losses on financial assets

As for financial assets, except investments at fair value through profit or loss, IAS 39 is applied whether there is any objective evidence that they are impaired.

Evidence of impairment includes, for example, signifi-cant financial difficulties of the issuer, its default or delin-quency in interest or principal payments, the probability that the borrower will enter bankruptcy or other financial reorganisation and the disappearance of an active mar-ket for that financial asset.

The recognition of impairment follows a complex anal-ysis in order to conclude whether there are conditions to effectively recognize the loss. The level of detail and the detail with which testing is being undertaken varies depending on the relevance of the latent losses of each investment.

A significant or prolonged decline in the fair value of an investment in an equity instrument below its average cost is considered as an objective evidence of impair-ment.

The threshold of significance is defined at 30%, while the prolonged decline in fair value is defined as a con-tinuous decline in market value below average cost for 12 months.

If an investment has been impaired in previous periods, further fair value declines are automatically considered prolonged. If there is objective evidence of impairment the loss is measured as follows:❚ on financial assets at amortised cost, as the difference

between the asset’s carrying amount and the present

Accounting for derivatives

Derivatives are financial instruments or other contracts with the following characteristics:❚ their value changes in response to the change in in-

terest rate, security price, commodity price, foreign exchange rate, index of prices or rates, credit rating or other pre-defined underlying variables;

❚ they require no initial net investment or, if neces-sary, an initial net investment that is smaller than one which would be required for other types of contracts that would be expected to have a similar response to changes in market factors;

❚ they are settled at a future date.

Derivatives are classified as at fair value through profit or loss.

In relation to the issue of some subordinated liabilities, the Group hedged the interest expense rates and GBP/EUR exchange rate, recognised as cash flow hedges and accounted for as hedging instruments.

According to this accounting model the portion of the gain or loss on the hedging instrument that is deter-mined to be an effective hedge is recognized directly in an appropriate item of comprehensive income while the ineffective portion of the gains or loss on the hedging in-strument is recognized in profit or loss. The amount ac-cumulated in the other components of comprehensive income is reversed to profit and loss account in line with the economic changes of the hedged item.

When the hedging instrument expires or is sold, or the hedge no longer meets the criteria for hedge account-ing, the cumulative gain or loss on the hedging instru-ments, that remains recognized directly in the other components of other comprehensive income from the period when the hedge was effective, remains sepa-rately recognized in comprehensive income until the forecast transaction occurs. However, if the forecasted transaction is no longer expected to occur, any related cumulative gain or loss on the hedging instrument that remains recognized directly in the other components of comprehensive income from the period when the hedge was effective is immediately recognized in profit or loss.

Further the Group set cash flow hedges on forecast re-financing operations of subordinated liabilities that are accounted for as hedge of a forecast operations, that are highly probable and could affect profit or loss. The portion of the gain or loss on the hedging instrument that is determined to be an effective hedge is recog-

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tions granted is estimated at the grant date and is based on the option pricing model that takes into account, at the grant date, factors such as the exercise price and the life of the options, the current price of the underlying shares, the expected volatility of the share price, the div-idends expected on the shares and the risk-free interest rate as well as the specific characteristics of the plan it-self. The pricing model is based on a binomial simulation that takes into account the possibility of early exercise of the options. If present, the pricing model estimates separately the option value and the probability that the market conditions are satisfied. Therefore, the above-mentioned values determine the fair value of equity in-struments granted.

Long term incentive plans, aimed at strengthening the bond between the remuneration of management and expected performance in accordance with the Group strategic plan, as well as the link between remuneration and generation of value in comparison with peers, are also treated as an equity-settled share-based payment.

The fair value of the right to obtain free shares in rela-tion to market condition is assessed at grant date and is based on a model that takes into account factors such as historical volatility of the Generali share price and of the peer group, the correlation between these shares, the dividends expected on the shares, the risk-free in-terest rate as well as the specific characteristics of the plan itself. The pricing model is based on simulation models generally used for this type of estimation. Other conditions different than market condition are consid-ered external to this valuation. The probability that these conditions are satisfied, combined with the estimated fair value of the right to obtain free shares, defines the overall plan cost.

The cost is charged to the profit and loss account and, as a double-entry, to equity during the vesting period, taking into account, where possible, the probability of satisfaction of the vesting condition related to the rights granted.

The charge or credit to the profit or loss for a period rep-resents the change in cumulative expense recognised as at the beginning and end of that period.

No expense is recognised for awards that do not ulti-mately vest, except for equity-settled transactions for which vesting is conditional upon a market or a non-vest-ing condition. These are treated as vested irrespective

value of estimated future cash flows discounted at the financial asset’s original effective interest rate;

❚ on available for sale financial assets, as the difference between the cost and the fair value at the measure-ment date.

Reversals of impairment are recognized respectively: in the profit or loss in the case of debt instruments, in the equity reserve in the case of equity securities including shares of mutual funds (IFU).

Use of estimates

The preparation of financial statements compliant to IFRS requires the Group to make estimates and as-sumptions that affect items reported in the consolida-tions financial balance sheet and income statement and the disclosure of contingent assets and liabilities. The use of estimates mainly refers to as follows:❚ insurance provisions for the life and non-life segment;❚ financial instruments measured at fair value classified

in level 3 of the fair value hierarchy;❚ the analysis in order to identify durable impairments

on intangible assets (e.g. goodwill) booked in in the balance sheet (impairment test);

❚ deferred acquisition costs and value of business ac-quired;

❚ other provisions❚ deferred and anticipated taxes;❚ defined benefit plan obligation;❚ share-base payments.

Estimates are periodically reviewed and are based on key management’s best knowledge of current facts and circumstances. However, due to the complexity and un-certainty affecting the above mentioned items, future events and actions, actual results ultimately may differ from those estimates, possibly significantly.

Further information on the process used to determine assumptions affecting the above mentioned items and the main risk factors are included in the paragraphs on accounting principles and in the risk report.

Share based payments

The stock option plans granted by the Board in past peri-ods configure as share based payments to compensate officers and employees. The fair value of the share op-

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The dilutive effect of outstanding options is reflected as additional share dilution in the computation of diluted earnings per share.

Information of financial and insurance risk

In accordance with IFRS 7 and IFRS 4, the information which enables the users to evaluate the significance of financial instruments on the Group’s financial position and performance and the nature and extent of risks arising from financial instruments and insurance con-tracts to which the entity is exposed and how the entity manages those risks are disclosed in the Risk Report.

In this section the Group provides qualitative and quanti-tative information about exposure to credit, liquidity and market risks, arising from financial instruments and in-surance contracts, and sensitivity analysis to assess the impact of the variation of principal financial and insur-ance variables on equity, profit and loss or other relevant key indicators.

of whether or not the market or non- vesting condition is satisfied, provided that all other performance and/or service conditions are satisfied.

When the terms of an equity-settled award are modified, the minimum expense to be recognised is the expense had the terms had not been modified, only if the original terms of the award are met.

An additional expense is recognized for any modifica-tion that increases the total fair value of the share-based payment transaction, or is otherwise beneficial to the employee as measured at the date of modification.

When an equity-settled award is cancelled, it is treated as if it vested on the date of cancellation, and any ex-pense not yet recognised for the award is recognized immediately. This includes any award where non-vest-ing conditions within the control of either the entity or the employee are not met. However, if a new award is substituted for the cancelled award, and designated as a replacement award on the date that it is granted, the cancelled and new awards are treated as if they were a modification of the original award, as described in the previous paragraph.

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